Last year, I was at a friend's birthday party, who, like me, worked in investment banking. Unsurprisingly, most people at the party was working in the same space; many well-off, promising faces from investment banks and funds. Another friend was speaking to me about leaving her job without a continuation plan, to which I asked if she had any emergency savings. To my surprise, not only was she not familiar with the rainy-day saving concept, but she also had less than £500 saved after several years. "That's barely a month, not even two weeks of expense", said I. To illustrate to her how imprudent it was, I asked around the party of how much savings people had. Even more astonishing, not a single person in this crowd had more than £1,000 in savings; while most had less than £500.
Assuming a typical first-year investment banking analyst salary of £55k ($70k) and a 50% bonus of £27.5k, how do people who make 2.4 times the average London salary (£34.5k) end up without any savings?
To understand the cause of this, I conducted a survey on the spending behaviour of my peers. £55k base at a 33% effective tax rate (with National Insurance/other contributions) results in take-home pay of c.£3k/month. The following essential expenses already account for around £2.1k/month.
• Food: weekday meals or groceries - £100/week or £433/month
• Rent - £200/week or £860/month
• Essential bills (electricity, water, gas) - £25/week or £108/month
• Phone bills - £10/week or £43/month
• Transport cost (public transport and some taxi rides) - £50/week or £215/month
• Other miscellaneous expenses such as clothing, household amenities, gadget/travel insurance, gym membership, other online subscriptions (e.g.Spotify/Netflix) and more - £100/week or £433/month.
If you often eat out and/or going out 2-3 times every weekend with an average spend of £50 per occasion, this amounts easily to £645/month. After deducting student loan repayment of another c.£300/month, we've exhausted £3k. This is how many have been living on their pay checks month-on-month without any savings.
In addition, setting imprudent personal finance management asides, most junior bankers often scale-up their standards of living based on what they think they'll be able to achieve with their salaries. They don't actually realize that their salaries will run out faster than they think.
It's because their salaries run out that many also spend their bonuses. The £27.5k bonus, equivalent to c.£18.k take-home pay, is often spent unwisely because people think they deserve some relaxation after such an intense work-hard/play-hard schedule.
Hence there are:
• Two annual long vacations (all-inclusive of hotels, flights, meals and experiences, at £2.5k each) costing £5k.
• Three short weekend vacations (all-inclusive at £1k each) costing £3k.
• Expensive hobbies (skiing, skydiving, golf, scuba diving, sailing courses, sport car rentals, fencing, equestrian, art club, or wines) easily costing an average £100/week or £5.2k a year.
• Branded clothing/accessories such as expensive suits, handbags, shoes or a combination costing £250/month or £3k a year.
• Costly spontaneous, impulse spending such as last-minute concerts or spontaneous spending on nights out, costing £1k a year.
• Spending on an electronic device upgrade or new much-hyped gear such as a phone, laptop, tablet, drone, camera or hoverboard. £1k a year.
As such, we are left with less than £500 from the £18k.
It's easy to spend money. It's also a mistake. Prioritising a rainy-day fund or starting to save for retirement is a habit you need to get into early in your career. - Especially in banking, where you might leave your job without an exit plan.
If you're a junior banker you therefore need to remind yourself that you're not that rich after all. Your money will disappear faster than you think.
Below is the flow chart I used to manage my money while I was at Goldman Sachs. I strongly recommend that anyone in banking follow the same approach!
Mai Le was an investment banking associate at Goldman Sachs before she left to found her own venture Vietnam Inbound (vietnaminbound.com). Besides writing on her own blog (lequynhmai.com), she also runs a cover-letter sharing community called Cover Letter Library (coverletterlibrary.com).
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